EuroFinance

Sharing the spotlight were treasury leaders from food manufacturing equipment company, JBT Corp and powersports manufacturer giant, Polaris, who offered a deep dive into their robust strategies for handling complex hedging in industrial manufacturing, and adeptly steering through the fluctuations of commodity and FX volatility. 

JBT Corp: The art of hedging in industrial manufacturing

JBT Corp, a leader in producing large-scale food manufacturing equipment, operates in a complex and fluctuating global market. Headquartered in Chicago and with a presence in over 25 countries, the company specialises in creating bespoke industrial equipment – a process that inherently involves lengthy production times and significant exposure to foreign exchange (FX) risk.

Navigating this environment, JBT Corp’s treasury team, co-led by assistant treasurer Sherri Speaks, faces the intricate task of mitigating financial risks associated with long project cycles and diverse international operations. “It takes anywhere from seven to nine months to build a large scale freezer” Speaks explains, highlighting the challenges in managing cash flows and FX exposures for such extended durations.

The treasury’s approach is meticulous and tailored to each contract. This strategy is vital in protecting the organisation’s margins from the volatility of currency markets. With a significant amount of cross border sales activity, managing FX risk is not just a financial necessity but a strategic imperative. The treasury team focuses on hedging individual contracts at the business unit level, a task that demands precise coordination and timely data from various segments of the company.

The complexity of JBT Corp’s operations means that delays in production, change orders, and varying payment timelines can significantly impact cash flows, making effective hedging a moving target. “We’re at the mercy of the business unit to identify those exposures in a timely manner,” Speaks states, underscoring the dependency on accurate and prompt internal reporting for effective risk management.

Despite the challenges, the treasury team at JBT Corp has developed a robust system to manage these risks. Utilising third-party tools for data collection and reporting, and leveraging relationships with divisional CFOs, the treasury team ensures a cohesive strategy across the company. This collaborative approach is key to maintaining control over the financial uncertainties inherent in JBT Corp’s business model.

Moreover, the decision not to elect hedge accounting adds another layer of complexity to their risk management. The treasury team must constantly balance the accounting and economic outcomes of their hedging activities, often leading to significant P&L volatility. As Sherri articulates, “It’s about managing that noise,” a reference to the fluctuations in financial reporting due to unhedged FX exposures.

Polaris: Steering through commodity and FX volatility

Polaris, known for its range of power sports vehicles and products, operates in a dynamic and volatile market. Based just outside of Minneapolis, this $9 billion organisation manages a diverse portfolio that includes off-road vehicles, motorcycles, and pontoons, selling to over 100 countries. With such a global footprint, Polaris faces significant exposure to both FX and commodity price fluctuations.

The treasury team at Polaris, led by Eric Frankberg, director and assistant treasurer has developed a nuanced approach to hedging these risks. “We have hedging programs in place covering FX, commodities, and interest rate risks,” Frankberg explains, highlighting the multidimensional nature of their financial risk management.

On the FX front, Polaris has implemented a cash flow hedging program, focusing on specific currency exposures. However, they do not hedge balance sheet exposures, preferring to monitor these risks and live with the inherent volatility. This selective approach reflects the treasury team’s tailored risk management strategy, balancing the need for stability with the realities of market exposure.

The commodity side presents a unique challenge for Polaris. The organisation’s significant reliance on steel and diesel for manufacturing its products led to the initiation of a dedicated hedging program. This move was catalysed by the macroeconomic environment, particularly the dramatic fluctuations in steel prices. 

Implementing the commodity hedging program was not a straightforward task. It required extensive coordination with the sourcing team and a comprehensive understanding of the organisation’s supply chain and exposure. The treasury worked diligently to align their strategies with operational realities, fostering a collaborative environment where treasury and sourcing could work together to mitigate price risks effectively.

Frankberg elaborates on the operational challenges: “It took a good six to nine months to get off the dock with our hedging program.” This period involved extensive risk assessments, ensuring the feasibility of hedge accounting, and operationalising the program. The result was a more informed and strategic approach to managing commodity price volatility, integrating it seamlessly with the company’s broader financial goals.

Looking forward, Polaris aims to extend its risk management strategies to other commodities, reflecting a continuous commitment to evolving its treasury functions in line with the company’s needs and market dynamics.

Collaboration and communication

The essence of effective treasury management at JBT Corp and Polaris lies in their commitment to collaboration and clear communication. Both organisations, despite their distinct industrial backgrounds, showcase how synergistic relationships within various departments are crucial for managing financial risks.

While Speaks underscores the significance of acquiring timely data from various business units to enhance the accuracy of FX hedging, Frankberg highlights the crucial role of aligning treasury strategies with the sourcing team. This collaboration is pivotal in managing commodity risks and integrating treasury efforts with broader corporate objectives, demonstrating a strategic approach to financial risk management.

Both companies demonstrate that managing treasury risks extends beyond financial calculations; it requires a deep understanding of operational processes and an ability to communicate complex strategies effectively. These insights underscore that in the realm of treasury management, collaboration and clear communication are not just beneficial but essential for navigating market complexities.